Bond Rally a Plus for Refis, But Stocks Cast Long Shadow

Interest rates have moved in the mortgage industry's favor, but a plunging stock market is hardly good news for home lenders.

The market "could dampen the appetite for homebuying, because the wealth buildup in the stock market has been a contributor to homebuying," said David Lereah, chief economist for the Mortgage Bankers Association of America.

Still, he said, the bond rally-which continued Monday, with the 30-year Treasury yield hitting a new low of 5.26%-will lead to lower mortgage rates, stimulate the housing market, and "improve affordability of homes." It will also lead to more refinancing, Mr. Lereah said.

He predicted that lower rates will permit the record level of home sales to continue, but he added a caveat: "If the stock market continues to correct, all bets are off."

Mr. Lereah said within a few weeks, more than half the applications for loans will be for refinancings, rather than purchases, "which is extremely high," he said.

Before last week, mortgage activity had slowed from its blistering pace earlier in the year.

Applications for mortgages to buy homes dipped to 3.3% in the week ended Aug. 21, and applications to refinance dropped 7.5%, according to the association's seasonally adjusted index. Refinancing activity accounted for 45.2% of applications, down 0.6% from the previous week.

Lenders are still waiting for the increase in refinancings. Though the volume of phone calls has increased, none of the lenders surveyed by American Banker reported a surge in demand similar to that of January, after the Asian debt crisis first sent rates tumbling.

Greg Lumsden, managing director of loan origination at Countrywide Home Loans, Calabasas, Calif., said that call volume increased slightly last week. But "that doesn't mean application volume is up; this type of market makes people call more often." he said.

"Uncertainty makes the phone ring. When the equity markets are in turmoil, it creates uncertainty. People get on the phone because they want to know what's going on."

Mr. Lumsden said a huge surge in refinance volume at this time of year would be uncharacteristic, because people are on vacation or preparing to send kids to school. "Relative to what you'd normally expect in August, business is good," he said.

Steve Rotella, chief operating officer at Chase Home Finance, the mortgage unit of Chase Manhattan Corp., said Chase expects the drop in interest rates to stimulate refinancing business, "but given that it just happened a week ago, it hasn't had any near-term effect on those percentages."

Until recently most in the mortgage industry believed that 1999 would be slower than 1998 in originations volume. But "given recent events it's uncertain whether that will be the case. It seems more likely today that rates could move down" Mr. Rotella said Monday afternoon.

Mortgage rates are now attractive to borrowers who refinanced in 1993 as well as to those who refinanced or bought a new home within the last two years, said Melvin A. Steele, senior vice president for secondary marketing at PNC Mortgage, Vernon Hills, Ill.. "To the extent that Treasuries continue to rally, and mortgages with them, there will be a pickup in applications."

"We would expect that these rates at or just below 7% on 30-year-fixed would be pretty attractive for borrowers to refinance," he said.

Norwest Mortgage said it was expecting a pickup in application volume as well. Last Thursday, Norwest said the average 30-year fixed-rate mortgage was at 6.875% with no discount points, down from 7% a week earlier, a company spokeswoman said.

Though the wealth generated by the stock market over the last few years has led to the acquisition of larger, more expensive homes, the downturn in the stock market "will create a confidence change" that could lead to a "pullback in affluent housing over the next run," said Patrick S. Flood, president of HomeBanc Mortgage Corp., Atlanta.

"We have an awful lot of influences that are going to drive our marketplace in the future," he said.

"The refinance business has seen an uptick in the last 30 days as a result of rates dropping down some," but interest rates have not dropped as much as the stock market, he said. "We really need to see another drop in interest rates, another quarter to a half in point, and then I think we'll see a substantial uptick in refinances."